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To Be More Than Quick Splash, Gilead’s CAR-T Purchase Faces Hurdles

[Updated 8/28/17, 6:45p.m. ET. See below.] Gilead Sciences CEO John Milligan promised today that the company’s $11.9 billion acquisition of Kite Pharma and its cutting-edge CAR-T cell therapy would not be a “one and done” proposition. “This is a long-term play with multiple product opportunities,” Milligan said, calling it the foundation of Gilead’s “fairly nascent” cancer business.

Unless drug regulators make a shocking turn in coming months, Gilead (NASDAQ: GILD) should have an historic approval to mark its acquisition. By Nov. 29, the FDA will decide whether to approve Kite’s (NASDAQ: KITE) first CAR-T cell therapy product, axicabtagene ciloleucel, or axi-cel, as a treatment for the most desperate cases of non-Hodgkin lymphoma. Because of the high rate of remission and manageable side effects in Kite’s clinical studies, an FDA rejection would be a major surprise.

Beyond that, however, Kite’s prospects—and those of the CAR-T field more generally—become much more speculative. Kite, which will operate as a division of Gilead, must navigate a minefield of technical and biological problems while outpacing well-heeled competitors. The deal prompted plenty of skepticism among public investors. In a Mizuho Securities survey of 112 investors, 59 percent of respondents said Gilead overpaid for Kite. [The results of the Mizuho survey have been updated.]

The price tag, at $180 a share, is a 29 percent premium to Kite’s closing share price Friday. While Gilead wants to expand axi-cel to NHL patients with less advanced disease and other blood-borne cancers, the company says the business from the first indication—relapsed or refractory NHL—in large part should make the deal “revenue neutral” within three years, Milligan said. “The vast majority of our valuation” for the deal comes from axi-cel, he said.

The premium is somewhat deceptive. Kite stock was already up 210 percent in 2017, which makes Gilead’s willingness to pay more “bracing,” wrote Leerink analyst Geoffrey Porges in a research note Monday, “and suggests that Gilead is expecting [annual] revenue of $2 to 3 billion from Kite’s CAR-T platform in the future.”

Gilead officials today did not make sales projections for axi-cel; in the Mizuho survey, respondents estimated peak axi-cel revenue, on average, at $1.6 billion a year.

One prominent owner of Kite stock gave his thumbs-up. “We are happy shareholders today and are grateful for all that Kite has accomplished for patients who will benefit from CAR-T,” wrote Brad Loncar in a note. Loncar runs an investment fund dedicated to cancer immunotherapy. The fund index (NASDAQ: CNCR) climbed more than 6 percent Monday with the Kite deal news. Kite shares closed Monday 28 percent higher, at $178.05. Gilead shares climbed 90 cents to $74.69.

Analyst forecasts of future revenues can be notoriously off. And there are all kinds of open-ended questions about CAR-T, which has no approved products yet. Patient deaths due to extreme brain swelling last year scuttled a CAR-T to treat a form of adult leukemia, which was the lead product from Juno Therapeutics (NASDAQ: ticker:JUNO]]) at the time. A death from the same condition occurred in Kite’s key NHL trial but has not derailed axi-cel’s progress.

High prices and complex manufacturing could dampen demand for axi-cel, if approved. “The true inflection points in the Kite story are yet to come,” wrote Evercore ISI analyst Umer Raffat in a research note.

On a conference call today, Milligan and other executives pointed repeatedly to an upcoming Kite study, called Zuma-7, which will compare axi-cel to bone marrow transplant in patients with less severe cases of NHL. That comparison, for Kite and others developing CAR-T products, is a key consideration for the field. CAR-T’s side effects are generally manageable and tolerable when the patient has no other treatment options. But to replace bone marrow transplant—the standard of care and sometimes a cure—in earlier instances of disease, Gilead’s Milligan acknowledged, axi-cel would have to prove itself safe enough in larger studies.

Only then could companies possibly justify sky-high prices for their products. If they merely serve more as a “bridge” to get patients ready for transplants, CAR-T companies would have to lower their sightlines. For autologous CAR-T like Kite’s—meaning the therapy involves a complicated process that extracts a patient’s own T cells, engineers them outside the body, and ships them back to the patient for infusion—analysts have floated possible prices in the hundreds of thousands of dollars, the same range as the most expensive rare disease treatments.